Special Report: Capacitors & Resistors: An Attitude for Adjustment

Passive-component manufacturers are moving ahead with planned production-capacity increases for 2001 to meet strong demand from several industry sectors, primarily networking and telecommunications. Although there is no consensus on how much production capacity needs to be brought on line next year, suppliers agree that increases are necessary.

Compared with recent capacity increases, however, suppliers are being more cautious. A few blips on the radar screen indicate that OEMs may be adjusting their inventories.

Part of the problem is the industry's own volatility. Unless manufacturers are confident in the market's strength, they will invest conservatively in plants and equipment.

"Demand clearly calls for additional expansion, and we expect to spend a lot of money next year in terms of equipment and floor space," said Sandy Beck, vice president of worldwide marketing at Kemet Electronics Corp., Greenville, S.C.

There still needs to be some capacity expansion next year, but probably not quite to the level seen in 2000, said Tim Hartigan, vice president and general manager of CTS Resistor Electro Components Inc., Berne, Ind. "We still see strong demand, but there are a few pockets of caution."

"In the long term, the market looks strong, but in the short term, we're going through an adjustment period," said Elden Grace, marketing manager at Murata Electronics North America Inc., Smyrna, Ga.

Demand is expected to continue for the balance of the fourth quarter, but the pace is easing, said Mike Morton, senior vice president of product marketing at passives distributor TTI Inc., Fort Worth, Texas. He said this is the result of customers taking this time to adjust their supply chains as inventories have grown in certain product areas.

"We feel that the fourth quarter will be an adjustment period, with demand increasing again in the first quarter," Morton said.

Most passive-component manufacturers report that November's backlogs are healthy and incoming bookings are still strong. Demand continues to exceed existing capacity, said Glyndwr Smith, assistant to the chief executive and senior vice president of Vishay Intertechnology Inc., Malvern, Pa.

A key factor behind the component makers' decisions to move ahead with capacity increases in 2001-though they will not be as significant as this year's-is that demand for ceramic capacitors, tantalum capacitors, and chip resistors will continue to outstrip the current supply. Supply and demand most likely won't balance out for many components until the first or second quarter of 2001, industry observers said.

"In the second quarter, we should see supply and demand equalize, and we see some decent lead times," said Rick Montrose, applications engineer at resistor-network manufacturer Bourns Inc., Riverside, Calif.

Whether supply and demand will balance out depends a lot on the market, Kemet's Beck said. "There's a lot of confusion today about what's going on in the industry generally, but it'll still be pretty robust next year," he said.

In addition, demand from several key industries continues to be strong. Worldwide discrete-capacitor revenue is expected to be $12.2 billion this year, an 8.9% increase from 1999 capacitor sales, according to Frost & Sullivan, San Jose. Unit shipments will increase substantially, from 74.3 billion this year to 84.5 billion in 2001, the market researcher said, but revenue will grow only 8.8%, to $13.2 billion, due to pricing pressure.

Although the demand forecast for cell phones-a major consumer of small chip capacitors-has been whittled down, there is still strong growth coming from that market. Even with cell-phone manufacturers reducing their forecasts, these companies will still produce 40% more handsets than they did the previous year, so the market is still strong and aggressive, according to Vishay's Smith.

And despite the forecast revisions from cell-phone manufacturers and the capacity expansions that are starting to come on line, there is continuing strong demand for 0402-size ceramic capacitors, said Eric Pratt, director of SuppliTool Services at iSuppli Corp., a Web-based component company in El Segundo, Calif.

Demand is growing for high-capacitance multilayer ceramic capacitors (MLCCs), Pratt said, both to offset the ongoing tantalum-capacitor shortage and to meet the increasing need for higher capacitance in high-performance circuits.

In the past, capacitor manufacturers have endured some double ordering by OEMs determined to maintain steady supplies of components. This practice has aggravated attempts to level out prices and profit margins.

"Now, with consumer electronics requiring more capacitors with each new design, and new applications for their products, capacitor makers are more willing to negotiate long-term supply contracts, assist their customers in developing alternate supply channels, and cooperate on finding solutions," said Mike Tanahashi, strategic planning manager at Taiyo Yuden (U.S.A.) Inc., San Jose.

Learning from the past

When the high-demand cycle hit last year, some passives makers initially held back on their production-capacity increases because an oversupply a few years earlier had caused severe price erosion.

Depressed demand and extreme price erosion put a damper on any significant capacity investments in 1998 and 1999, although component manufacturers continued to invest in their facilities and R&D to remain competitive.

During this upturn in demand, passive-component makers put in more production capacity, but at a rate that would not cause an overbalance in supply. Plus, with the severe erosion in ASPs for two years, combined with lower profitability, passives makers were reluctant to quickly bring on more production increases. Profitability had to improve before they could add capacity.

So instead of adding capacity blindly, passives makers sat down with their key customers, including distributors, to evaluate their true demand and planned accordingly. In past cycles, passives suppliers had added capacity at a rate much greater than demand. This time they heeded lessons learned from the past and expanded at a much more deliberate rate, TTI's Morton said.

"[Passive-component manufacturers] waited longer this time to make certain that the forecast demand was real and that they were able to validate it rather than reacting quickly," Morton said. "At the same time, they couldn't react quickly because prices had been so depressed and ASPs eroded to a point where there was very little profitability for component manufacturers," he said.

While passives manufacturers have worked to expand production capacity to meet demand in 2000, there are significant lead times associated with bringing on new lines and equipment. Even with substantial capacity increases this year, there are still shortages in ceramic capacitors, tantalum capacitors, and resistors.

"But we're starting to see improvements, first for ceramic capacitors," Morton said. Lead times for ceramic capacitors in 0402 and 0603 case sizes are about 14 weeks, he said.

Morton expects to see availability improve for resistor chips in the first or second quarter of 2001. But tantalum capacitors will continue to be in short supply throughout next year, not so much because of a lack of capacity, but because of a shortage in tantalum powder, he explained.

Resistor chips in larger 0805 and 1206 case sizes will be the slowest to recover because most of the additional capacity brought on this year was for 0603 and smaller case sizes, Morton said. There is limited demand for 0402 chip sizes at this time, he added.

Typical of major suppliers, Vishay expanded capacity a bit last year, a lot this year, and plans to scale back next year. In 1999, the component maker expanded unit capacity by about 8%, and plans to increase capacity by as much as 30% this year, depending on the product line, Smith said. Next year, it expects to continue capacity expansion by roughly 10%.

Vishay's capital-spending budget for this year is about $250 million, up from $120 million last year, Smith said. A little less than half of this year's expenditures are for passive-component capacity.

"For 2001, we're already allocating that capacity to our strategic customers," Smith said. "Everybody's saying that they don't see the situation improving until the second quarter of 2001, but let's see where we are at the end of this quarter."

Kemet brought on no additional capacity in 1999, with the exception of a few minor increases to alleviate lead-time problems. "In fiscal 1999, when our revenue fell by $100 million, we still spent a significant amount of money in investment," Beck said.

In its current fiscal year, which began April 1, Kemet is increasing unit production capacity by roughly 40% for a variety of capacitor sizes and dielectrics, and about 25% for fiscal 2002. Kemet is adding 85,000 sq. ft. of manufacturing space for solid-tantalum and conductive-polymer tantalum capacitors in Matamoros, Mexico, and three sites in South Carolina.

These expansions are in addition to the company's 250,000- sq.-ft. tantalum manufacturing facility, which began production last fall in Ciudad Victoria, Mexico. Also, a 30,000-sq.-ft. expansion at Kemet's Fountain Inn, S.C., plant, at which ceramic surface-mount capacitors will be manufactured, is expected to be completed in December. The Fountain Inn project amounts to a 50% capacity expansion of existing products as well as a rapid ramp-up of manufacturing capacity for base-metal electrode and high-capacitance products, the company said.

Kemet's expenditure will reach more than $200 million in fiscal 2001. "If the market continues to cooperate, we'll spend more money in 2002 to support demand. We're committed to getting supply and demand in balance," Beck said.

Kemet is calling on its customers to be involved in the process. "We've adopted a new model where we're asking the customers to share the risk with us and to make a commitment in terms of volume. The worst thing that could happen is that the cycles get longer and higher. The better we as a whole supply chain can moderate the depth and duration of those cycles, the better off we all are," Beck said.

Today, Kemet is breaking ground for a new plant in Mexico. "You can never stop investing if you want to remain competitive," Beck said. "You just have to moderate it properly at the right time. There's no question that we'll be expanding, and we've continued to expand. Our capital investment has never been zero."

There is still insufficient supply in the marketplace for most products, Beck said. However, lead times look good for 0603 and 0402 ceramic devices and A- case tantalum capacitors, he said.

Over the past year, Murata Electronics North America has focused on bringing high-capacitance products, primarily tantalum replacement ceramics, to the market. Murata has doubled its production capacity in Japan for its new GRM line of high-capacitance tantalum-replacement ceramic capacitors. This has reduced the lead times on the GRM Series from 52 weeks or more down to 16 weeks, the company said.

Murata has also focused heavily on expanding capacity for its low-temperature co-fired ceramic products, high-frequency SAW filters, EMI filters, and inductors. The company spent about $670 million on capital improvements in the fiscal year ended in March and will invest about $900 million in this fiscal year, Grace said.

To keep up with continued strong demand from telecommunications, networking, and computer markets, AVX's capacity-expansion program remains strong going into 2001. The company plans to invest heavily to boost capacity for key product lines, including ceramic capacitors, tantalum capacitors, thin-film capacitors, integrated passive devices, and ferrites.

AVX Corp.'s capital outlays for the fiscal year ended in March totaled $179 million, and the company plans to exceed that total this fiscal year. The Myrtle Beach, S.C.-based unit of Japan's Kyocera Corp. has expanded capacity at several ceramic and tantalum facilities in Brazil, Ireland, Mexico, and Myrtle Beach, among other sites.

That translates into more than 200,000 sq. ft. of additional production area for capacitors, or a 25% increase in overall footage, said Willie King, division vice president of product marketing at AVX. King sees demand continuing to increase quarter by quarter for at least the next three quarters.

There is still a tight supply for high-capacitance/voltage (C/V) ceramic capacitors in 0805 and 1206 case sizes, King said. "For those case sizes, we're shifting around capacity so that we'll be better able to support demand in 2001," he said.

"Certainly we'll continue to do our normal capacity increases on the ceramic and tantalum [side], but a major focus next year will be in the area of low-inductance solutions to provide better filtering," King said.

Advances in materials

Another Japanese supplier, Taiyo Yuden Co. Ltd., recently opened a plant in South Korea dedicated to the production of nickel-based high-capacitance MLCCs. The Tokyo-based company has also spent nearly $8.5 million on a new plant in China to produce 0402 capacitors and inductors, according to Tanahashi of Taiyo Yuden (USA).

With additional plant upgrades under way, Taiyo Yuden will have doubled its first-quarter 2001 production capacity from the comparable period of 2000, Tanahashi said.

Some capacitor manufacturers are also using new materials, such as nickel-based internal/external electrodes, to lower costs and increase performance, according to Tanahashi. These MLCCs are beginning to replace expensive, more complex tantalum capacitors in some applications.

"Advances in materials processing technologies have resulted in the development of the ultrafine particles used in 0201 MLCCs," Tanahashi said.

Several recent offerings from Taiyo Yuden use these new technologies, and the company believes they can address allocation concerns by offering alternatives to hard-to-get tantalum capacitors.

As a result of ramped-up production capacity and technological advances, Taiyo Yuden's lead times are shrinking from an average of 10 to 12 weeks for 0402 capacitors to as low as 8 to 12 weeks for high-capacitance Ni-based MLCCs, Tanahashi said.

Despite the inventory adjustments or realignments in the fourth quarter, passive-component manufacturers expect to experience healthy sales growth for the full year.

Kemet will end up with growth in the neighborhood of 40% this year, according to Beck. "Networking equipment is still quite strong. The only market that's not growing in excess of traditional rates is the PC market, but it only means that it's not growing at a rate of 20%," he said.

Profits rose tenfold in Kemet's fiscal second quarter, ended in September, due to high demand for its products from several industry sectors.

This year, Murata's unit sales have increased about 20% to 25% for capacitors. The company's overall growth will be well into the 25% to 30% range, Grace said.

Passives distribution specialist TTI expects to double its business this year, partly on the basis of tremendous growth from the networking infrastructure industry, Morton said.

In North America, Rohm Corp. expects its sales to grow about 25% this year, but that number also includes its semiconductor products.

Vishay's total sales reached $1.75 billion in 1999, and analysts estimate that the company's sales will grow to about $2.5 billion this year. Sales for the third quarter, ended Sept. 30, increased by 51%, compared with the third quarter of 1999.

AVX also recently reported strong results. For its fiscal second quarter, ended in September, the company's sales rose 87% from the year-ago period.

And at CTS Corp., third-quarter sales increased 23%, to $222.1 million, compared with $180.2 million during the same period in 1999. Net earnings in this interval increased 34%, to $21.3 million.